Bank of Israel Cuts Interest Rate to 3.5% for Second Consecutive Time

The Bank of Israel's Monetary Committee decided on Monday to reduce the interest rate by 0.25%, bringing it down to 3.5%. This marks the second consecutive rate cut and the third reduction since the start of the year, lowering the rate from 4.25% to 3.5% over five decisions in 2024. The move aligns with analysts' expectations and reflects the central bank's response to current economic conditions.

Governor Amir Yaron is scheduled to hold a press conference at 16:15 to explain the decision and present the bank's updated macroeconomic forecast. The rate cut follows two months of stable inflation at 1.9%, within the Bank of Israel's target range of 1% to 3%. Inflation expectations remain below 2%, indicating confidence in the central bank's policies and enabling the rate reduction.

The bank aims to ease pressure on exporters, particularly in the high-tech sector, who face challenges from a strong shekel that reduces profitability and may contribute to job cuts. The latest macroeconomic forecast, published alongside the rate decision, updates projections made in March during Operation Iron Swords. At that time, growth for 2026 was estimated at 3.8%, with 5.5% expected in 2027. The Finance Ministry recently forecasted 4% growth for 2026, while the IMF predicted a more conservative 3.5%.

Regarding the deficit, the previous forecast anticipated a 5.3% deficit, pushing national debt to 70.5% of GDP. Inflation was projected to end 2026 at 2.2% and 1.8% in 2027. Interest rates were expected to reach 3.5%-3.75% by March 2027, meaning the current rate of 3.5% in July 2026 has already met those expectations.

The Monetary Committee currently operates with five members instead of the legally required six. Professor Naomi Feldman was reappointed as an external member, alongside Professor Uri Heftz and internal members including Deputy Governor Andrew Abir and Research Department Director Dr. Adi Brender. There is agreement to appoint Dr. Gil Bafman as the sixth member, but government approval is still pending.